Running the averages part of sad discussion

Tina Haapala |

Written by Gary Silverman, CFP®

Today we continue looking at a sad 15 years of investing. Recap: From 2000 through the end of 2015, the stock market has averaged a “stellar” return of 2-3%.

When I left y’all last week, you were probably depressed. I talked about three periods where the stock market had massive double-whammy bear markets: The Great Depression, the ‘70s, and the current millennium. I left off saying, “Why bother?” Here’s why.

The first lesson from this article series: You can’t count on average. At least you can’t for investment periods as “short” as 15 years. If you ask the experts what the average long-term return from stocks is, you’ll get answers from 6 to 11 percent. The rather wide variation depends on a number of assumptions that are used in giving you the answer. But whether you thought 6% or 11% is the better number, if you had been counting on that for the last 15 years and put your money into a nice S&P 500 index you would have been very disappointed with the 2-3% you actually received.

In other words, while the average return you might see over 15 years in stocks is about 10%, “average” is not normal. Reading this now, you know you are a person who instead would have seen average as 2-3%. If we were talking back in the year 2000, the previous 15 years would have averaged you a 15% rate of return. Talk to folks in our retirement communities and they grew up in a depression where the 15-year average was negative. And yet the 100-year average is about 10%.

If you can’t count on 15 years as giving you an average average…what does it take? Well, according to a nice article by Pu Shen of the Kansas City Federal Reserve, it takes close to 20 years to guarantee your stock holdings will keep up with inflation. Other studies show that about 17 years gets you a positive return. Think of those two last sentences: You can have 17-20 years of effectively treading water.

Don’t get too morose, remember that’s not what usually happens, that’s just what can happen. Yet, assuming you don’t get to control time, you do not know what’s coming next. That’s why, even if the market is truly doing a stellar job and earning my clients 10-15%, my assumption is that the second they decide to retire we’ll start an ugly period, like the last sad 15 years.

Here’s the problem though: If the last 15 years have been great, it is often hard to convince folks to reign it in and sensibly invest for the future. The reverse of this is true now. While a recent or prolonged rise makes it seem like nothing will stop the bull, a recent or prolonged stagnation or decline makes us sure that the next bull will never come. “Things are different now,” we think.

Next week: Well, stocks stink; what about bonds?

This article was published in the Wichita Falls Times Record News on April 17, 2016.